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Republicans’ failure to repeal the taxes underlying the Affordable Care Act makes
eliminating the deduction for state and local taxes even more important to their tax
reform plans.

The ACA repeal failure makes revenue-neutral tax reform harder, Frank Sammartino,
senior fellow at the Urban Institute’s Tax Policy Center, told Bloomberg BNA. The
savings from the American Health Care Act were to be used to help pay for the rate
cuts envisioned by Republicans and President Donald Trump.

Ending the state-and-local deduction, a move pushed by Trump as well as congressional
Republicans, would free up
$1.3 to $1.7 trillion over 10 years, according to the Tax Policy Center and the Tax
Foundation, respectively. The deduction is one of the costlier items in the tax code.

Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn have
been meeting with lawmakers, including Senate Majority Leader Mitch McConnell (R-Ky.),
House Speaker Paul Ryan (R-Wis.), and House Ways and Means Committee Chairman Kevin
Brady (R-Texas), on the tax reform outline that involves eliminating the SALT and
other deductions as well as lowering tax rates.

“Federal tax reform seems much more likely to get done,” Meg Wiehe, deputy director
of the Institute on Taxation and Economic Policy, told Bloomberg BNA. “One of the
key reasons is there has been a lot of engagement by the Trump administration.”

Tax changes will still be hard to get through Congress, but Republicans are starting
a from a different, better place than they did with health care, she said.

A revenue-neutral tax plan passed using the budget reconciliation process would allow
the Senate to pass tax reform with just 50 votes, and Vice President Mike Pence could
provide the tie-breaking vote, if needed.

$1.3 Trillion

Most Republicans are committed to ending it, arguing that many of the taxpayers who
take the deduction will still benefit from overall tax rate reductions. Taxpayers
with incomes of more than $100,000 would have the largest tax increases both in dollars
and as a percentage of income if the deduction is nixed, the Tax Policy Center said.

“In our tax reform plan, Americans are going to see some significant tax cuts and
often without having to itemize,” Brady told reporters July 17. “We are going to deliver
without state and local taxes being an itemized deduction.”

Critics say the deduction works as a subsidy and encourages states, such as California,
New York, and Connecticut that are dominated by Democrats, to set higher rates and
spend more taxpayer money.

Elected officials in those states, among other Democrat-leaning ones, have been vocal
in opposing the plan to eliminate the SALT deduction.

“According to the Joint Committee on Taxation, more than 88 percent of the benefit
of state and local tax deductions accrued to those with incomes over $100,000 in 2014,
while only 1 percent flowed to taxpayers with incomes below $50,000,” according to
a report from the Washington-based Tax Foundation.

Trump’s plan would eliminate more than
$67 billion in state and local tax deductions reported by New Yorkers on their federal
income taxes,
according to a report by state Comptroller Thomas DiNapoli.

State Fight for Deduction

Groups that represent state and local governments also are fighting for the deduction’s
survival.

In an April
letter to Congress, the Big 7, a coalition of organizations including the National Governors
Association, the U.S. Conference of Mayors, and the National Conference of State Legislatures
said eliminating or capping “federal deductibility for state and local property, sales
and income taxes would represent double taxation, as these taxes are mandatory payments
for all taxpayers.”

Eliminating the SALT deduction would come at a cost to state and local governments,
according to the Tax Policy Center report. “It could affect the mix of revenue sources
used by state and local governments and could lead to reductions in spending for programs
and services,” it said.

To contact the reporter on this story: Che Odom in Washington at
COdom@bna.com

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